Answer to bonus question is 'No'

Anthony Hilton
6 Feb 2009

If the Government wants the last vestiges of public support for its banking bailout to wither away, it need only let Royal Bank of Scotland pay bonuses to its star traders.

The bank is bust, and was delivered into that state by its past and present management and employees, and the bonus culture they embraced.

It survives by dint of Government handout, not because anyone in the country thinks it deserves to survive but because we fear that, were it to fail, we would all suffer much more and the consequences for the economy would be dire.

It is a principle of extortion that Chicago gangsters would be comfortably familiar with. The bank gets the bailout money not because it deserves it, but because of the fear of something worse if it doesn't get it.

It would no doubt be argued by those in line for bonuses that the problems are not their fault, that the bit of the bank they worked in was profitable, and that they therefore deserve to be insulated from the fallout.

But that is like saying the hole is at the other end of the rowing boat, and therefore no concern or fault of theirs. The fact is that when a business goes under everyone suffers, the innocent employees and those more directly responsible.

Why should it be a different law for banks? They should be grateful they still have jobs, not whingeing that they don't have bonuses.

It is appalling that they appear to need reminding that the taxpayers put money into the banks in an effort to keep the wheels of commerce turning, not so it could be siphoned off into the pockets of favoured employees.

On a wider point, there has been a surprisingly lukewarm response from commentators in Britain to President Obama's plan to cap such payouts in the US. There seems to be an argument that these troubled banks will not get the management they need unless shareholders again agree to massive incentive plans and performance-pay schemes.

Anyone swallowing this agreement has learned nothing from history. We put our faith in the ability of bonuses and performance pay to deliver good management last time, and all it served to do was bankrupt individual banks and virtually destroy the whole system.

If that was the result in benign conditions, what perverted logic makes people think the results of a further injection of bonuses would be any better in bad times?

UK Financial Investments, the company set up by the Government to manage its shareholdings in banks, said yesterday it was still in discussions about remuneration. But what is there to discuss? What part of "no" do bankers not understand?

Be wary of bond funds

Typically, it will launch and sell new funds to clients at a point in the cycle where the investors would be better holding on to their money or putting it somewhere else.

In the late 1980s when Tokyo's Nikkei Average approached 39,000, fund managers marketed Japanese growth funds.

The market collapsed and has not regained more than half its 1989 peak in the 20 years since. Around the millennium, with the technology bubble inflating nicely, that became the hot sector for fund launches. Customers were duly wiped out.

Then, a couple of years ago, commodity and property funds caught the eye. Commodities have since plunged, and most property funds have taken such a battering they are restricting customers' ability to withdraw their money. And all this is without mentioning the split-capital investment trust debacle.

Now corporate bond funds are hot. Interest rates are at rock bottom, dividend cuts are undermining conventional unit trusts so people are attracted to the yields on corporate bonds. True to form, the industry is meeting this demand with new launches.

I have nothing against corporate bond funds or the managers who run them, but you have to wonder if now is the time to buy.

The credit crunch is making life difficult for companies, and predictions are there will soon be a significant increase in defaults.

Sometimes this makes the bonds worthless, others it merely leaves them severely damaged. Either way, you don't want to be a holder when this happens.

Interest rates are the lowest they have ever been. While they could fall a little bit more, it is far more likely they will rise in the years ahead. When they do, the capital value of other interest-rate securities - including corporate bond funds - is highly likely to fall.

But I think the most telling reason to steer clear is that bond funds offer no protection against inflation.

You may be of the view that deflation is the threat, in which case buy away. But if you think all this money being pumped into the economy must at some point come gushing out the other end, you will be concerned that inflation is the far more likely option.

When that happens, the last place you want to be invested is in bonds.